A Qualified Domestic Relations Order (QDRO) is commonly used to divide the community portion of a qualified ERISA governed retirement plan in a divorce asset settlement. The process of dividing an employer retirement plan, like a 401(k), requires a QDRO however the process of obtaining and processing a QDRO is not always simple. If you are negotiating a divorce settlement, I strongly suggest contacting your local Certified Divorce Financial Analyst® to help you understand that process and the tax ramifications of utilizing those dollars post-divorce.
Unfortunately, there are situations in which someone, intentionally or not, gets behind on their agreed obligations of either child support or spousal maintenance (aka alimony). In working in the financial service industry and guiding couples through the divorce process it is not uncommon that the two largest assets an individual has are locked in either home equity or a 401k. A possible solution for these types of situations is to utilize a Qualified Domestic Relations Order or QDRO (the same used to divide an asset in a divorce) to access funds that would seemingly be locked up. The drafting of the QDRO would need to be specific as to who the alternate payee should be and who is paying the taxes. There may also be a required federal withholding on the QDRO transfer so the amount would need to be calculated properly to account for that automatic withholding. It’s important to note that this is still a taxable event and who is paying the taxes should be clearly outlined so that the correct person receives the 1099-R. Also, if someone is under the age of 59 ½ there is normally an additional 10% tax penalty for withdrawing funds from a qualified plan, but that is waived if the funds are pursuant of a QDRO (would bold this just to signify the importance of it).
If you find yourself, or know someone, trying to obtain back child support or spousal maintenance I would encourage you to seek the guidance of a Certified Divorce Financial Analyst® (CDFA®) at Next Step Divorce Solutions. We help you identify all your financial options and can provide guidance on determining whether utilizing the QDRO strategy is the best solution for your situation.
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